Pros and Cons of Backing Winners in Innovation Policy

Jo, Seung-gyu and den Butter, Frank A. G. (2009): Pros and Cons of Backing Winners in Innovation Policy.

Abstract

In the economics profession there is a fierce debate whether industrial and innovation policy should be targeted to specific sectors or firms. This paper discusses the welfare effects of such targeted policies in a third-market international trade model under imperfect competition. A theoretical case for picking winners through a preferential innovation policy is discussed, which is shown to hold without evoking retaliation from foreign competitors. However, in practice information uncertainties remain a concern. The question whether in this case ‘backing winners’ is a wise policy option depends on the characteristics of the information asymmetries and on the extent the government is able to design selection procedures in a way to minimize the transaction costs that may be caused from the market participants’ opportunistic behavior.

• Item Type: MPRA Paper
• Language: English
• Keywords: Innovation policy; R&D subsidies, strategic trade policy, asymmetric information, spill-over effects
• Subjects: O - Economic Development, Innovation, Technological Change, and Growth > O2 - Development Planning and Policy > O24 - Trade Policy ; Factor Movement Policy ; Foreign Exchange Policy; F - International Economics > F1 - Trade > F12 - Models of Trade with Imperfect Competition and Scale Economies ; Fragmentation; O - Economic Development, Innovation, Technological Change, and Growth > O3 - Innovation ; Research and Development ; Technological Change ; Intellectual Property Rights > O32 - Management of Technological Innovation and R&D; C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C73 - Stochastic and Dynamic Games ; Evolutionary Games ; Repeated Games

References

AWT: Advisory Council for Science and Technology Policy (2003), ‘Backing Winners; van generiek technologiebeleid naar actief innovatiebeleid,’ Report 53, July 2003. (in Dutch).

d’Aspermont, C. and A. Jacquemin (1988), ‘Cooperative and Noncooperative R&D in Duopoly with Spillovers,’ American Economic Review, 78, pp. 1133-37.

Bergstrom, T.C. and H.R. Varian (1985), ‘Two Remarks on Cournot Equilibrium,’ Economic Letters, 19, pp. 5-8.

Bowley, A. (1924), Mathematic Foundations of Economics. New York, Oxford University Press.

Brander, J.A. and B.J. Spencer (1983), ‘Strategic commitment with R&D: the Symmetric Case,’ Bell Journal of Economics, 14, pp. 225-235.

Brander, J.A. and B.J. Spencer (1985), ‘Export Subsidies and Market Share Rivalry,’ Journal of International Economics, 18, pp. 83-100.

Eaton, J. and G.M. Grossman (1986), ‘Optimal Trade and Industrial Policy under Oligopoly,’ Quarterly Journal of Economics, 101, pp. 383-406.

Gruenspecht, H.K. (1988), ‘Export Subsidies for Differentiated Products,’ Journal of International Economics, 24, 331-344.

Jacobs, B. and J. Theeuwes (2005), ‘Innovation in The Netherlands: the market falters and the government fails,’ De Economist, 153, pp. 107-124.

Jo, S-G. (2009a), ‘Non-uniform Strategic Trade Policy and Aggregate Profit Creation Effect,’ forthcoming, Scottish Journal of Political Economy.

Jo, S-G. (2009b), ‘Similarity and Dissimilarity of Export Subsidy and R&D Subsidy,’ mimeo, VU University Amsterdam.

Kujal, P. and J.M. Ruiz (2007), ‘Cost Effectiveness of R&D and Strategic Trade Policy,’ The B.E. Journal of Economic Analysis & Policy, 7, issue 1, Article 21.

Leahy, D. and C. Montagna (1998), ‘Targeted Strategic Trade Policy with Domestic Cost Heterogeneity,’ Dundee Discussion Papers in Economics, Dundee, University of Dundee

Maggi, G. (1999), ‘Strategic Trade Policy under Incomplete Information,’ International Economic Review, 40, pp. 571-594.

Neary, J. P. (2000), ‘R&D in Developing Countries: What Should Governments Do?’ London, Center for Economic Performance, London School of Economics and Political Sciences.

Neary, J. P. and P. O’Sullivan (1999), ‘Beat’em or Join’em? Export Subsides versus International Research Joint Ventures in Oligopolistic Markets,’ Scandinavian Journal of Economics, 101, pp. 577-596.

Neary, J. P. (1994), ‘Cost Asymmetries in International Subsidy Games: Should Government Help Winners or Losers?’ Journal of International Economics, 37, pp. 197-218.

Qiu, L. D. (1994), ‘Optimal Strategic Trade Policy under Asymmetric Information,’ Journal of International Economics, 36, pp. 333-354.

Salant, S.W. and G. Shaffer (1999), ‘Unequal Treatment of Identical Agents in Cournot Equilibrium,’ American Economic Review, 89, pp.585-604.

Supasri, Y. and M Tawada (2007), ‘Endogenous Timing in a Strategic Trade Policy Game: A Two-Country Oligopoly Model with Multiple Firms,’ Review of Development Economics, 11, pp. 275-290.

WRR: Scientific Council for Government Policy (2008), ‘Innovatie Vernieuwd: Opening in Viervoud,’ Reports to the Government No. 80, Amsterdam, Amsterdam University Press. (in Dutch).